One of my first blog posts sought to answer the question, “Is CGL FDLL Coverage Worthless?” At that time, I only had a few blog subscribers, so the questions keep coming in, as they had for years when I managed the Big “I” Virtual University. So, let’s take another look at how to insure damage to leased premises, given that there are usually 3-4 options.
Your insured leases a building or part of a building. To address damage TO the building, what is the appropriate way of covering it…CGL alone, CGL fire damage legal liability (FDLL), the ISO CP 00 40 Legal Liability Coverage Form, or the ISO CP 00 10 Building and Personal Property Coverage Form (or BOP)?
The answer is the usual one…it depends. And, in this case, it depends on what the lease requires or makes the tenant responsible for in the form of an indemnity/D&D clause or in the insurance requirements of the lease.
Many leases require the tenant to carry FDLL at a specified limit. That’s problematic. The ISO CGL policy excludes damage to rented premises. An exception is made for premises leased for over a week IF the insured purchases FDLL coverage for a specified limit. The main problem with relying on FDLL coverage (among several problems) is that it only covers one peril…fire. How many leases today make the insured responsible ONLY for fire damage? The answer is probably “none.”
A common recommendation is to cover damage to a building or part of a building (occupied premises, HVAC equipment, plate glass, or whatever the lease requires) using the ISO CP 00 40 form. This form has at least two deficiencies. First, it only covers legal liability and many leases make the tenant responsible for ANY damage beyond normal wear and tear. For example, a tenant might be responsible for vandalism damage to windows or theft of copper wiring or tubing from an HVAC unit regardless of any tort liability on the tenant’s part. Second, and this applies to the CGL FDLL coverage as well, most courts have held that the basis for valuation of third-party property damage is ACV, not replacement cost. Nothing in the CP 00 40 (or CLM Rule 66) appears to provide a replacement cost option for damage, something that might be specified in the lease.
That leaves the ISO CP 00 10 (or a BOP policy) as the only reasonable products to approach compliance under most leases. To maximize that compliance, the CP 10 30 Special Causes of Loss form should be used. This is particularly important given that it’s the only one of the three primary causes of loss forms that would cover vehicle damage. One of the most common questions I’ve received over the years about damage to leased premises involved collisions by vehicles, most often lift trucks.
This raises the issue of whether leases or other contracts should continue to demand minimum limits of CGL FDLL coverage, or require coverage on a direct basis. While we all know that it is usually far better (for many reasons) for the landlord to procure his or her own coverage, in the case of triple net leases, perhaps it’s time that the insurance requirements were rewritten to better serve the interests of both landlord and tenant?
Photo by sarae